“one hell of a wake up call, but it’s not the real thing”

The market is still digesting the once-in-a-generation move in bond yields we’ve seen this spring. Consider the below anecdote from the latest weekend notes by Eric Peters – Josh


Anecdote: “It’s a wake up call,” he said, calm, relaxed, alert. “A fire drill,” continued the market’s top volatility trader. You see, all this tapering talk from the Fed was a trial alarm. To test the market’s state of awareness. And as it turns out, the world was sound asleep. Even Goldman’s Hatzius was surprised, and of course, no one knows the Fed better than Jan. “Everyone was on the wrong side of this move, there was too much leverage, and you always see that manifest itself in a spike in vol.”

10yr Treasury vol jumped from 3.1% at the May lows to a 1.75yr high of 7.5% on June 24. Naturally, it can go a lot higher. And in genuine rate hike cycles, tends to. “Historically, before a really big move in rates, Pimco comes in and pays any price for vol – it’s as if they’re in the same room as the Fed,” he said, explaining that when that happens, there’s just one thing to do – the exact same thing as Bill. “But this time, the only really aggressive buyer was Brevan, and Alan’s great but he’s a trader so, you know, it’s different – he can buy one week and sell the next.”

For over a month now, vols jumped higher with each rise in yields, but by Tuesday, something changed. “Vol was offered, despite new lows in bonds – feels like the market’s finally found a healthier balance.” And with balance comes two-way risk for bond prices, something we haven’t seen in 6wks, during which time 10yr rates moved in a near straight-line from 1.65% to 2.65% (a 57% rate hike). “Yeah, this was one hell of a wake up call, but it’s not the real thing, for that we gotta wait till 2014, maybe even 15.”




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